Advance Tax is a part payment of your tax liability before the end of the financial year. It is also called pay as you earn scheme where the income tax should be paid in the year in which the income is received.
Who is required to pay?
Every person whose tax liability for a financial year exceeds Rs. 10,000 is required to pay the advance tax on an installment basis. please note that to calculate advance tax, income from all the heads are to be added.
For Salaried individuals
In the case of a salaried person, tax on salary is calculated by the employer. He is responsible to deduct tax (TDS) from your salary income and deposit the same to Government. So salaried person is not required to pay advance tax on salary income.
However, if a salaried person is having income other than salary (for eg. rental income from house property or interest from fixed deposits etc.) and if tax liability on such income exceeds Rs. 10,000 then he has to pay advance tax. It is very common for salaried people to have alternate income sources and as a result, they would become liable to pay advance tax.
For Presumptive Taxation
Up until FY 2015-16, assessees opting for presumptive taxation scheme were not required to pay advance tax. However, with effect from FY 2016-17 (AY 2017-18), assessees opting for presumptive taxation scheme will have to pay advance tax amount in a single installment on or before 15th March. From FY 2016-17 (AY 2017-18), Freelancers and professionals can also opt for the presumptive taxation scheme and avoid the cumbersome tasks of maintaining books of account and audit.
Advance Tax liability for the presumptive taxation scheme is to be calculated and paid only once before the end of the financial year. Here is how to advance tax should be calculated for the presumptive taxation scheme:
|Assessee type||Presumptive income||Advance tax liability|
|Business owners||8% of Turnover or Gross receipts||Tax at slab rates on presumptive income (flat 30% in case of partnership firm)|
|Professionals (Freelancers)||50% of professional fee receipts||Tax at slab rates on presumptive income (flat 30% in case of partnership firm)|
Freelancers and professionals who do not opt for the presumptive taxation scheme have to calculate and pay advance tax on an installment basis. They have to estimate their annual income and calculate advance tax on the same because in most cases TDS which is deducted by their customers/clients while making payments, is not enough to meet the total tax liability.
How is it Calculated?
- Step one: Estimate your income from business or profession. Add all the incomes from ongoing projects or assignments whose fees are already determined. Also, add the incomes which are expected on the basis of ongoing interactions with clients/customers.
- Step two: Subtract the expenses. You are allowed to deduct the expenses which are directly related to your business or profession. Rent, electricity, legal and professional fees, books, fuel expenses, the salary of employees, depreciation, etc. are some of the expenses which are allowed to be deducted from the income.
- Step three: Add incomes from remaining sources like house property, capital gains, income from other sources, etc. Then calculate the tax liability for your total income on the tax slab rates and deduct the TDS which has already been deducted from your income.
- Step four: If the resulting tax liability is more than Rs. 10,000 then you are required to pay advance tax on an installment basis as per the following schedule:
Due dates for payment of Advance Tax:
|Due date of installment||Advance Tax payable by Individual and Corporate Taxpayers|
|On or before 15th June||15% of the advance tax liability|
|On or before 15th September||45% of the advance tax liability|
|On or before 15th December||75% of the advance tax liability|
|On or before 15th March||100% of the advance tax liability|
In the case of salaried individuals, TDS is deducted from their salary and deposited to the government by their employer. So as far as salary income is concerned, they are not required to pay advance tax. However, for all the incomes other than salary, if the total of such incomes exceed Rs. 50,000 then they will have to assess the tax liability on the same and pay advance tax.
Before every due date for payment of advance tax, you will have to calculate your expected annual income and determine the tax liability on the same. If your total tax liability exceeds Rs. 10,000 then you are liable to pay advance tax as per the schedule has given above.
There are two ways of tax payment:
– Deposit in the bank with advance tax challan or
– Online payment using Net banking facility
As mentioned above, if you fail to pay advance tax or make a late payment of advance tax, you will have to pay penal interest. Under section 234B, interest for default in payment of advance tax is levied at 1% simple interest per month or part of a month